Wednesday, April 12, 2017

The End of China’s Export Juggernaut: China has been an exporting juggernaut for decades. In the United States, this has meant a dramatic increase in China’s share of imports and a ballooning bilateral trade deficit. Gaining sales in the United States at the expense of other countries, Chinese goods rose from only 2 percent of U.S. non-oil imports in 1990 to 8 percent in 2000 and 17 percent in 2010. But these steady gains in U.S. import share have stopped in recent years, with China even losing ground to other countries in some categories of goods. One explanation for this shift is that Chinese firms now have to directly compete against manufacturers in high-skill developed countries while also fending off competition from lower-wage countries, such as Vietnam. This inability to make additional gains at the expense of other countries means that exports don’t contribute as much to China’s overall growth as they used to.

Taking the U.S. Market by Storm—And Then, Not so Much The United States had a merchandise trade deficit of $350 billion with China in 2016, accounting for roughly half of the overall U.S. trade deficit. The import growth of goods from China has been impressive, with imports from China growing at an annual rate of 14 percent since 1990, while total U.S. imports were growing at an annual rate of only 6 percent. That is, China has had great success in selling to the United States by taking market share away from other countries.

A breakdown of U.S. imports into the four largest categories, accounting for roughly two-thirds of the total, demonstrates the source of this success. As seen in the chart below, China’s import shares for apparel, electronics, electric machinery, and non-electric machinery were all fairly high in 2002, the beginning of the data series used here, and continued to increase. In 2002, China accounted for 25 percent of all U.S. apparel imports and 15 percent of all electronics imports. By 2010, these shares were up to 50 percent and 40 percent, respectively. Market-share increases in general machinery and electrical machinery were less dramatic but still substantial over this period, rising by 8 percentage points (to 15 percent) and 11 percentage points (to 35 percent), respectively.

So which countries were losing market share during this period? In apparel, Mexico’s share of U.S. imports dropped by 7 percentage points and Hong Kong’s slipped by 6 percentage points from 2002 to 2010. South Korea and Taiwan had smaller losses in market share over the same horizon. Japan was the main loser of U.S. import share for other major manufactured goods. For electronics, Japan’s U.S. share fell by 7 percentage points, while 2-percentage-point share declines were reported for South Korea, Singapore, Taiwan, and Canada. For electrical equipment, Japan lost 7 percentage points of the U.S. market, with Germany, the United Kingdom, and Taiwan also losing market share. For non-electric machinery, China’s gains were largely at the expense of goods produced in Japan.

Around 2010, China’s ability to gain market share from other imports faltered. The import share for Chinese apparel has dropped over the past five years, while the share for electronics, by far the largest of the four categories, declined last year. China’s share of the U.S. electric machinery market is showing tentative signs of falling and its gains in the non-electric machinery category have ended.

Limits to China Increasing Its Market Share It is not a complete surprise that Chinese goods would eventually peak as a share of U.S. imports. To keep increasing their share of the U.S. import market, Chinese firms would need to gain sales by competing more directly against manufacturers in Europe, Japan, and other advanced economies. China would also need to successfully compete against other developing countries with lower labor costs. Indeed, China has been ceding market share to Vietnam for electronics and electrical machinery, while India and Bangladesh have been making gains in apparel. It may be the case that assembly operations are moving from China to lower-wage countries, repeating the process that previously benefited China.

The challenge for China is that its exports to the United States are now only growing as fast as total U.S. imports since its goods are no longer displacing those from other countries. From 2000 to 2010, U.S. imports from China grew at a 20 percent annualized rate. From 2010 to 2016, the rate of growth dropped to 4 percent. This slowdown has also hit China’s exports (in U.S. dollars) to the rest of the world, which slowed from a 21 percent annual growth rate in the 2000-10 period to 5 percent since 2010.

Measuring the Impact of Slower Export Growth Is a Challenge When evaluating the slowdown in China’s exports, it is important to recognize that trade data measure the value of goods that arrive from a particular country, not that country’s contribution to the item’s value. For example, if a U.S. import from China is largely made of components produced in Japan and assembled in China, then the import data would significantly overstate the revenue that ended up in China from that sale. Cross-border supply chains are motivated, in part, by differences in labor costs, with components manufactured using high-wage labor and the assembly of these parts done in low-wage countries. This processing of components into final goods has been an important attribute of Chinese exports. The chart below shows that exports of such goods peaked in 2000 at almost 60 percent of China’s total exports. So, to the extent that China’s export growth figures reflect trade in processed goods, they overstate the domestic gains China has realized from these export sales when taken at face value.

More recently, however, the data show a significant decrease in China’s processing trade amid an overall slowdown in export growth. Processing exports fell to 50 percent of China’s total exports in 2010 and then declined rapidly, hitting 35 percent in early 2017. This transformation partly reflects rising wages in China (as the skill level of its workers increases) and the related migration of assembly operations from China to lower-wage countries. A positive take on these developments is that each dollar of exports now has a larger positive impact on domestic income. The negative take is that China’s much more modest export performance is, in part, due to the loss of processing exports that would have otherwise been a source of income.

Challenge for China Exports have been a great boost to China’s economic development, with rapid increases in foreign sales helping to transform the economy into a major producer of the world’s manufactured goods. The slowdown in export growth in recent years has been substantial and highlights the difficulties of trying to compete in foreign markets against both high- and low-wage countries. One of the consequences of the end of China’s export boom is that it puts more pressure on domestic demand to sustain the country’s rate of growth.

Disclaimer The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Friday, March 24, 2017

Why scrapping NAFTA would be Trump’s big gift to China: I was in Mexico Thursday seeing the Mexican president, foreign minister and finance minister and addressing a convention of bankers. The only subjects anyone is interested is the future of NAFTA and U.S. Mexican relations.

I came to Mexico from Beijing, and so I was able to report that there was no greater strategic gift the United States could give China than to abrogate NAFTA and rupture the North American community. ... China apart, NAFTA strengthens the U.S. economy. ...

There is a silver lining in all the fuss over NAFTA — it needs updating. Digital trade didn’t exist in 1993. Thinking has shifted on the need to assure that trade agreements are in worker interests. This means more emphasis on labor standards and more need to ensure that dispute settlement systems do not overly empower corporate interests. Most important, with more competition from Asia and with the increased sophistication of the Mexican economy, there is a strong case for strengthened rules of origin that enhance North American manufacturing.

Changes along these lines may have an “America first” aspect but they are also in Mexico’s interest. They are the right way forward.

It is also essential that the United States and Mexico find a way forward on immigration. A wall is a 19th-century response to a 21st-century concern. I’m told that most illegal immigration does not take place through people crossing open borders in the desert — the only thing a wall could address. Rather it takes place through illegal entry at legal checkpoints as people are smuggled in in freight containers and the like. This will be unaffected by a wall. Technology, data science, enhanced collaboration, and cooperation with respect to Central America are much better ways to resist illegal immigration flows. They are also much more likely to strengthen our alliance with our most populous neighbor.

Tuesday, February 14, 2017

On inequality in China: With Trump and Brexit, the Western-type democratic model is under fire. The Chinese media are having a field day. In column after column, the Global Times (official daily newspaper) condemns the explosive cocktail of nationalism, xenophobia, separatism, TV-reality, vulgarity and ‘money reigns supreme’, the outcome of the so-called free elections and the wonderful political institutions which the West would like to impose on the world. No more lessons!

Recently the Chinese authorities organised an international colloquium on ‘The Role of Political Parties in Global Economic Governance’. The message sent to the colloquium by the Chinese Communist Party (CCP) was perfectly clear. Reliance on solid intermediary institutions such as the CCP (which includes 90 million members, or roughly 10% of the adult population, almost as many as the number of voters in the American or French primaries) enables the organisation of discussions and decision-making and the design of a model for stable, harmonious and duly considered development in which identity conflicts can be overcome.

By so doing, the Chinese regime may well be over-confident. The limits of the model are well known, beginning with the total lack of transparency and the ferocious repression suffered by all those who condemn the opacity of the regime. ...

Wednesday, February 08, 2017

Competition from China Reduced Domestic Innovation: While much attention has been paid to the impact of Chinese imports on U.S. factory employment, relatively little has been focused on other affected areas, such as innovation by American manufacturers.

In Foreign Competition and Domestic Innovation: Evidence from U.S. Patents (NBER Working Paper No. 22879), David Autor, David Dorn, Gordon H. Hanson, Gary Pisano, and Pian Shu compare firm-level data on patents obtained in the period 1975 to 1991—before the surge in Chinese imports—with data for the period 1991 to 2007. They find that while patent output and exposure to trade were not significantly correlated in the earlier period, they were in the latter.

China's exports made up nearly 19 percent of the world's total in 2013, up from just 2.3 percent in 1991. The study finds that corporations in U.S. industries where the Chinese made their greatest inroads experienced the most pronounced decline in innovation.

The researchers use patents as their main proxy for innovation, but the study's conclusions are corroborated by corresponding trends in research and development spending. Corporations tightened their belts across the board as imports eroded revenues. There was no association between rising imports and patents generated among entities relatively immune to international market forces, such as universities, hospitals, and nonprofit research institutions.

In conducting their study, the researchers controlled for other factors that could influence the rate of patent generation, such as the post-2001 dot-com bust, a trend toward greater scrutiny of patent applications, and pre-existing trends in the rate of patenting in key industries.

The study's long-term perspective, using data from 1975 to 2007, reveals a growth trend in patenting in the computer and electronics industries and a trend of stagnation of patenting in chemicals and pharmaceuticals, which are two of the most important sectors for innovation. Both of these trends predate the surge in Chinese import competition of the 1990s and 2000s, which was much stronger in the computer and electronics industries than in industries that create new chemical patents.

Given the countervailing trends in these two large, patent-intensive sectors, simple correlations would suggest — misleadingly, it turns out—that industries with larger increases in trade exposure during the sample period of 1991 to 2007 did not exhibit significant falls in patenting. Once the researchers account for preexisting trends in just these two sectors—computers and chemicals—the adverse impact of trade exposure on industry patenting becomes strongly apparent and can be precisely estimated.

While manufacturing employs less than a tenth of U.S. private nonfarm workers, it accounts for two-thirds of the country's research and development spending and corporate patents. "The relationship between competition in the global marketplace and the creation of new products and production processes is thus one of immense importance for the U.S. economy," they write.

The researchers ask why corporations do not spend more on innovation in the face of mounting Chinese imports. One possibility is that firms assume increased competition will lead to a permanent decline in the profitability of their market sectors, giving them little incentive to invest. Another is that American consumers, accustomed to low-cost Chinese goods, have become less inclined to pay more for innovative alternatives. A third possibility is that as American companies shifted their factories to lower-cost countries while keeping R&D at home, the geographic separation impeded the coordination that helps fertilize innovation.

"Each explanation has important implications for both policy and our understanding of the impact of trade on economic performance," the researchers conclude.

I am among those who think this is a bad idea. This isn’t the right time to signal that China’s long-standing exchange rate management has crossed over the line and become manipulation. If China responded by ending all exchange rate management—no daily fix, no band, no intervention, a true float—the renminbi would certainly fall, and potentially fall by a lot.

Uncomfortable as it is to say, right now it is in the United States’ economic interest for China to continue to manage its exchange rate. ...

I guess you could argue that that China’s reserves sale have been persistent and one-sided, and thus fit the letter of law. But China has sold foreign exchange in the market to keep the yuan from depreciating. The monthly data suggest has China not bought foreign exchange in the market to keep the yuan from appreciating in the past 6 quarters or so... Its intervention in the market has worked to prevent exchange rate moves that would have the effect of widening China’s current account surplus over time. Every indicator of intervention that I track is telling the same story.

I can see how a case could be made that China’s broader exchange rate management—notably its use of the fix to guide the CNY—could meet the 1988 law’s definition of manipulation. ... I have consistently argued that China’s currency is still tightly managed. ...

But that doesn’t mean naming China is a good thing to do right now. ...

The goal of the United States right now, in my view, should be to encourage China to manage its currency in a way that doesn’t give rise to strong expectations of further depreciation that could fuel potentially unmanageable outflows—while encouraging China to put in place the bank recapitalization and social safety net needed to more permanently wean China off external demand. ...

I am more optimistic than Andrew is, even with data from the expansion of social insurance in the ‘aughts, for three reasons:

• There is significant evidence that higher spending on public health in particular lowers savings

• There are still significant gaps in China’s social safety net that could be filled in and thus there is scope to make China’s system of social insurance more generous.

• Many of China’s social insurance programs seem to take in more in contributions than they pay out in benefits. That is part of the reason why it isn’t a surprise that the expansion of social insurance, as they were designed, didn’t lower national savings. And it is also suggests there is scope to change the way social insurance is funded and in the process lower national savings.

Let me take each point in turn. ...

Bottom line: A broad redesign of China’s system of social insurance seems to offer potential to lower China’s level of savings.

These issues here of course are complex: the balance between social insurance and incentives to work; the balance between a pay-go system and a funded system; and the question of how to split cost and responsibilities between municipality, province and the central government.

Yet it still seems, from affair, that there is room to reform China’s system of social insurance in ways that would provide stronger and more consistent coverage, with more portable benefits, ideally financed through a more progressive system of taxation.

And in the interim, well, China’s central government has ample fiscal space and could easily pick up more of the tab – allowing contributions to be cut temporarily. That seems like a healthier way of providing short-term stimulus than another round of credit loosening. It does, though, require tolerance of bigger central government fiscal deficits.

Reliably quantifying these effects is very challenging. Most notably, data quality and availability and changing relationships between economies over time complicate efforts. There are also some technical (but nevertheless important) problems arising from modeling the global economy that features many interdependent individual economies.

Using an econometric technique that examines interdependence of individual economies in the global economy, the Chinese slowdown and its impact on U.S. output growth can be assessed, as well as changes in the relationship since 2000.

Thus, it appears that the impact of slowdown in China on the U.S. economy has increased over time—at the turn of the century, slower growth in China would have had a small effect on the U.S. Today, reducing Chinese output growth by 1 percentage point shaves about 0.2 percentage points from U.S. output growth. ...

In the real world, it doesn't happen like this. It takes time for workers to find new jobs, if they can find them. New businesses and new job openings at existing businesses aren't created instantaneously. And wage adjustments, which create the incentives for workers to move and new jobs to be created, don't happen as fast as the textbooks generally assume.

And now, the effect of international trade and globalization has become a big issue in the presidential campaign. Recent research showing that a large number of manufacturing jobs have been lost to China helps explain why. But what evidence shows that trade with China actually changes voting behavior?

A recent paper from the National Bureaus of Economic Research attempts to answer this question. ...

Monday, April 04, 2016

Why the Fed has a wary eye on China's economy, by Mark Thoma: Uncertainty about the global economy is making the Federal Reserve more cautious about raising U.S. interest rates. That was Fed Chair Janet Yellen's message in a speech to the Economic Club of New York last week. This uncertainty is reflected in the Fed's dialed-back forecast for rate increases this year. In December, the central bank signaled that rates would go up by 1 percent over the course of the year, but that projection dropped to a half-percent at the Fed's most recent meeting.

And when the topic is the health of the global economy, the discussion is largely about the performance of the Chinese economy. From 2002 through 2011, China's average growth rate was a remarkable 10.6 percent, according to International Monetary Fund data. But that has fallen steadily to 6.8 percent in 2015, and it's projected to slide further to 6 percent by 2017 then level off in subsequent years.

But this forecast itself has quite a bit of uncertainty. China faces several challenges that it must overcome to avoid an even lower growth rate -- and perhaps a "crash landing." ...

Monday, March 14, 2016

The Real Reason to Worry About China: The world's largest currency union contains about 1.7 billion people and accounts for more than a third of global economic output. It also may be headed for a breakup...

I’m talking, of course, about the U.S. and China. For more than 20 years, China has kept the yuan's value against the dollar in a very tight range. ...

Over the past couple decades, China has been able to offset the effects of Fed policy by varying its relatively large level of public investment. It has always been clear, though, that China would no longer want to use fiscal policy in this way once its economy was sufficiently developed. The country's currency moves over the past few months suggest that it might have reached this point. ...

Any such breakup presents a big problem: Many businesses and financial institutions have entered into contracts that make sense only under the premise that the exchange rate is not going to vary much over time....

As far as I can tell, U.S. economic policymakers aren’t putting much emphasis on the potential repercussions of a break-up of the China-US currency union. ... There's a significant risk that if the Fed keeps tightening in 2016, it could force an abrupt break-up. The resultant disorder in the world economy would not serve Americans well.

China faces the classic policy trilemma of international economics, that a country cannot simultaneously have more than two of the following three: (1) a fixed exchange rate; (2) independent monetary policy; and (3) free international capital flows. Accordingly, China’s ability to manage its exchange rate may depend, among other factors, on its willingness and ability to adjust on other policy margins.

...[discussion of the costs and benefits of various options] ...

So what to do? An alternative worth exploring is targeted fiscal policy, by which I mean government spending and tax measures aimed specifically at aiding the transition in China’s growth model. (Spending on traditional infrastructure like roads and bridges is not what I have in mind; in the Chinese context, that’s part of the old growth model.) For example, as China observers have noted, the lack of a strong social safety net—the fact that Chinese citizens are mostly on their own when it comes to covering costs of health care, education, and retirement—is an important motivation for China’s extraordinarily high household saving rate. Fiscal policies aimed at increasing income security, such as strengthening the pension system, would help to promote consumer confidence and consumer spending. Likewise, tax cuts or credits could be used to enhance households’ disposable income, and government-financed training and relocation programs could help workers transition from slowing to expanding sectors. Whether subsidies to services industries are appropriate would need to be studied; but certainly, unwinding existing subsidies to heavy industry and state-owned enterprises, together with efforts to promote entrepreneurship and a more-level playing field, would be constructive.

There are recent indications China might be moving this direction. ...

Targeted fiscal action has a lot to recommend it, given China’s trilemma. Unlike monetary easing, which works by lowering domestic interest rates, fiscal policy can support aggregate demand and near-term growth without creating an incentive for capital to flow out of the country. At the same time, killing two birds with one stone, a targeted fiscal approach would also serve the goals of reform and rebalancing the economy in the longer term. Thus, in this way China could effectively pursue both its short-term and longer-term objectives without placing downward pressure on the currency and without new restrictions on capital flows. It’s an approach that China should consider.

Wednesday, March 09, 2016

China’s transparency challenges: At the recent G20 gathering in Shanghai, three Chinese leaders—Premier Li Keqiang, People’s Bank of China Governor Zhou Xiaochuan, and Finance Minister Lou Jiwei—reassured attendees that the Chinese government had the monetary and fiscal tools as well as the know-how to guide the economy through its current challenges. The success of the communications offensive, which seems to have calmed investor concerns for the moment, stands in strong contrast to the communications missteps that exacerbated adverse market reactions to the Chinese government’s stock market and currency interventions over the past year.

These statements at the G20 suggest that Chinese officials are better understanding the need to clearly explain major policy initiatives—a difficult transition for a government accustomed to secrecy. However, communication of this sort represents only one form of transparency. In this post we discuss two other important forms that complement clear explanations by policymakers: data transparency (producing believable numbers), and transparency about the rules of the game (being clear about rules and policies that affect participants in commerce, the markets, etc.). For China to fulfill its potential as a global financial and economic leader, it needs to make further progress on these dimensions as well. ...

Monday, March 07, 2016

When Fallacies Collide, by Paul Krugman, Commentary, NY Times: The formal debates among the Republicans who would be president have exceeded all expectations. Even the most hardened cynics couldn’t have imagined that the candidates would sink so low, and stay so focused on personal insults. Yet last week, offstage, there was in effect a real debate about economic policy between Donald Trump and Mitt Romney, who is trying to block his nomination.

Unfortunately, both men are talking nonsense. Are you surprised?

The starting point for this debate is Mr. Trump’s deviation from free-market orthodoxy on international trade. Attacks on immigrants are still the central theme of the Republican front-runner’s campaign, but he has opened a second front on trade deficits, which he asserts are being caused by the currency manipulation of other countries, especially China. This manipulation, he says, is “robbing Americans of billions of dollars of capital and millions of jobs.”

His solution is “countervailing duties” — basically tariffs — similar to those we routinely impose when foreign countries are found to be subsidizing exports in violation of trade agreements.

Mr. Romney claims to be aghast. In his stop-Trump speech last week he warned that if The Donald became president America would “sink into prolonged recession.” Why? The only specific reason he gave was that those duties would “instigate a trade war and that would raise prices for consumers, kill our export jobs and lead entrepreneurs and businesses of all stripes to flee America.”

This is pretty funny if you remember anything about the 2012 campaign. ... Mr. Romney was saying almost exactly the same things Mr. Trump is saying now. ...

More important than Mr. Romney’s awkward history here, however, is the fact that his economic analysis is all wrong. Protectionism can do real harm, making economies less efficient and reducing long-run growth. But it doesn’t cause recessions.

Why not? ... In fact, a worldwide trade war would, by definition, reduce imports by exactly the same amount that it reduces exports. There’s no reason to assume that the net effect on employment would be strongly negative.

Thursday, February 04, 2016

China’s growth prospects: ...it is not possible for the per capita growth rate to exceed 5% per year for very much longer.

China can be viewed as a convergence success story, in the sense that the strong economic growth over a sustained period led to a level of real per capita GDP that can be characterised as middle income. To put the Chinese accomplishment into international perspective, I calculated all the convergence success stories in the world based on reasonable criteria. Specifically, I looked first at countries that had at least doubled real per capita GDP since 1990. Within this group, I defined a middle-income success as having achieved a level of real per capita GDP in 2014 of at least $10,000. An upper-income success requires a level of at least $20,000 (the numbers are in 2011 US dollars and factor in international adjustments for changes in purchasing power).

A view that has gained recent popularity is the ‘middle-income trap’. According to this idea, the successful transition from low- to middle-income status is typically followed by barriers that impede a further transition to upper income. The data suggest that this trap is a myth. Moving from low- to middle-income status, as achieved recently by China, is difficult. Conditional on achieving middle-income status, the further transition to upper-income status is also difficult. However, there is no evidence that this second transition is harder than the first one.

As mentioned before, China’s growth rate of real per capita GDP has been remarkably high since around 1990, well above the rates predicted from international experience. Although I forecast that China’s per capita growth rate will decline soon from 7-8% per year to 3-4%, this lower growth rate is sufficient when sustained over two to three decades to transition from low- to middle-income status (which China has already accomplished) and then from middle- to high-income status (which China will probably achieve). Thus, although the likely future growth rates will be well below recent experience, they would actually be a great accomplishment.

Perhaps the biggest challenge is that the prospective per capita growth rates in China are well below the values of 5-6% per year implied by official forecasts. Thus, the future may bring political tensions in reconciling economic dreams with economic realities. Reducing the unrealistically optimistic growth expectations held inside and outside China’s government would reduce the risk of this tension and lower the temptation to achieve targets by manipulating the national-accounts data.

Sunday, January 17, 2016

Take the China explanation. A collapse of growth in China would indeed be a world changing event. But there is just no evidence of such a collapse. ...

Take the oil price explanation. It is even more puzzling. Traditionally, it was taken for granted that a decrease in the price of oil was good news for oil importing countries such as the United States. ... We learned in the last year that, in the short run, the adverse effect on investment on energy producing firms could come quickly and temporarily slow down the effect, but this surely does not undo the general conclusion. Yet the headlines are now about low oil prices leading to low stock prices. ...

Maybe we should not believe the market commentaries. Maybe it was neither oil nor China. Maybe what we are seeing is a delayed reaction to the slowdown in the world economy... Maybe…

I think the explanation is largely elsewhere. I believe that to a large extent, herding is at play. If other investors sell, it must be because they know something you do not know. Thus, you should sell, and you do, and so down go stock prices. Why now? Perhaps because we have entered a period of higher uncertainty. ...

So how much should we worry? This is where economics ... gives the dreaded two-handed answer. If it becomes clear within a few days or a few weeks that fundamentals are in fact not so bad, stock prices will recover... If, however, the stock market slump lasts longer or gets worse, it can become self-fulfilling. Low stock prices lasting for long lead to lower consumption, lower demand, and, potentially, to a recession. The ability of the Fed, fresh out of the zero lower bound, to counteract a slowdown in demand remains limited. One has to hope for the first scenario, but worry about the second.

China’s economic model, which involves very high saving and very low consumption, was ... possible when China had vast reserves of underemployed rural labor. But that’s no longer true, and China now faces the tricky task of transitioning to much lower growth without stumbling into recession.

A reasonable strategy would have been to buy time with credit expansion and infrastructure spending while reforming the economy in ways that put more purchasing power into families’ hands. Unfortunately, China pursued only the first half of that strategy... The result has been rapidly rising debt, much of it owed to poorly regulated “shadow banks,” and a threat of financial meltdown.

So the Chinese situation looks fairly grim...

As I suggested..., however, I have a hard time making the numbers for ... catastrophe work. ...China buys more than $2 trillion ... from the rest of the world each year. But it’s a big world, with a total gross domestic product excluding China of more than $60 trillion. Even a drastic fall in Chinese imports would be only a modest hit to world spending.

What about financial linkages? ... China has capital controls ... so there’s very little direct spillover from plunging stocks or even domestic debt defaults...

But I have to admit that I’m not as relaxed about this as ... I should be. ... And if my worries come true, we are woefully unready to deal with the shock. ...

Monetary policy would probably be of little help. With interest rates still close to zero and inflation still below target, the Fed would have limited ability to fight an economic downdraft... Meanwhile, the European Central Bank is already pushing to the limits of its political mandate in its own so far unsuccessful effort to raise inflation.

And while fiscal policy ... would surely work, how many people believe that Republicans would be receptive to a new Obama stimulus plan, or that German politicians would look kindly on a proposal for bigger deficits in Europe?

Now, my best guess is still that things won’t be that bad — nasty in China, but just a bit of turbulence elsewhere. And I really, really hope that guess is right, because we don’t seem to have a plan B anywhere in sight.

Until very recently there were two huge roadblocks in the way of any kind of global deal on climate: China’s soaring consumption of coal, and the implacable opposition of America’s Republican Party. ... But there have been important changes on both fronts.

On one side, there is a visible shift in Chinese attitudes... China faces a huge air quality crisis, brought on largely by coal-burning, which makes it far more willing to wean itself from the worst form of fossil fuel consumption. And China’s ... rapidly growing middle class ... demands a higher quality of life, including air that’s relatively safe to breathe. ...

Which brings us to the U.S. Republican attitudes...: the G.O.P. is spiraling ever deeper into a black hole of denial and anti-science conspiracy theorizing. The game-changing news is that this may not matter as much as we thought..., new technology has fundamentally changed the rules.

Many people still seem to believe that renewable energy is hippie-dippy stuff, not a serious part of our future. ... The reality, however, is that costs of solar and wind power have fallen dramatically, to the point where they are close to competitive with fossil fuels even without special incentives — and progress on energy storage has made their prospects even better. Renewable energy has also become a big employer...

This energy revolution has two big implications. The first is that the cost of sharp emission reductions will be much less than even optimists used to assume... The second is that given a moderate boost — the kind that the Paris accord could provide — renewable energy could quickly give rise to new interest groups with a positive stake in saving the planet, offering an offset to the Kochs and suchlike.

Of course, it could easily go all wrong. President Cruz or President Rubio might scuttle the whole deal, and by the time we get another chance to do something about climate it could be too late.

But it doesn’t have to happen. I don’t think it’s naïve to suggest that what came out of Paris gives us real reason to hope in an area where hope has been all too scarce. Maybe we’re not doomed after all.

Sunday, November 08, 2015

Grasp the reality of China’s rise: ...In the years ahead, China is likely to account for between one-third and one-half of growth in global incomes, trade and commodity demand, and its significance will only increase... I returned last week from a trip to China with the dispiriting conclusion that the world lacks shared understandings regarding goals for the evolution of the Chinese economy...

The first issue ... is whether it is the objective of the United States and the global community to see China succeed economically..., or whether it is our objective to contain and weaken China economically so that it has less capacity to mount global threats. This is seen in Beijing as a live question... The world cannot expect economic cooperation from Beijing if its objective is to inhibit Chinese economic performance. ... None of this is to say the United States does not have valid concerns...

Second,... the ... reforms that are necessary if China is to grow sustainably and strongly over the next decade ... will surely take a toll on growth in the short run. This ... will reduce demand for imports from the rest of the world and raise China’s trade surplus. ...

The world is likely to be well-served by recognizing that its deepest interests lie in China pursuing ... reform, even at the expense of modest reductions in China’s contribution to global demand ... and possibly more exchange rate depreciation than we would prefer. ...

Finally,... the United States’ failure to provide the necessary congressional approval to allow China’s voting power in the International Monetary Fund to rise above that of Belgium’s suggests a troubling indifference to global reality. ...

Today the perils of the future have much to do with China’s rise and with the worlds of commerce and economics. Let us hope that we find the wisdom to manage them well.

Monday, October 26, 2015

Economic Cycles in Ancient China, by Yaguang Zhang, Guo Fan, and John Whalley, NBER Working Paper No. 21672 Issued in October 2015: We discuss business cycles in ancient China. Data on Ancient China business cycles are sparse and incomplete and so our discussion is qualitative rather than quantitative. Essentially, ancient debates focused on two types of cycles: long run political or dynastic cycles of many decades, and short run nature induced cycles. Discussion of the latter show strong parallels to Jevons’ conception of sun spot cycles. The former has no clear contemporary analogue, were often deep in impact and of long duration. The discussion of both focused on agricultural economies. Ancient discussion on intervention focused on counter cyclical measures, including stockpiling, and predated Keynes and the discussion in the 1930s by centuries. Also, a strongly held belief emerged that cycles create their own cycles to follow, and that cycles are part of the inevitable economic order, a view consistent with Mitchell’s view of the business cycle in the 1940s. Current debates on how best to respond to the ongoing global financial crisis draw in part on historical precedents, but these are largely limited to the last 150 years for OECD countries and with major focus on the 1990’s. Here we also probe material on Ancient China to see what is relevant.

China's real unemployment rate is much higher than the official rate and, when correctly measured, is much closer to that in other nations at similar levels of development, according to "Long Run Trends in Unemployment and Labor Force Participation in China" (NBER Working Paper No. 21460). The study estimates that the actual unemployment rate in 2002-09 averaged nearly 11 percent, while the official rate averaged less than half that. Moreover, despite some reports to the contrary, by 2009 China's labor market had still not recovered from huge layoffs that occurred during the later 1990s and early 2000s as the nation transitioned from a government-controlled economy to one in which private enterprise and market forces were more at play.

"The official unemployment rate series for China is implausible and is an outlier in the distribution of unemployment rates across countries ranked by their stage of development," write researchers Shuaizhang Feng, Yingyao Hu, and Robert Moffitt. "We find that, by approximately 2002, the unemployment in China was actually higher than that of high income countries, exactly the opposite of what is implied by the official series."

The official unemployment rate in China, which is based on registered unemployment figures, has long been viewed with suspicion. Various private studies have tried to come up with better estimates. This paper uses for the first time a nationally representative sample of registered urban residents–the "hukou" population–based on urban household survey data, supplemented with weights derived from the decennial census. The study derives a much different picture of how Chinese unemployment has evolved since the mid-1990s.

The authors describe three distinct periods in China's labor market. The first–from 1988 to 1995–was characterized by an economy dominated by state-owned enterprises (SOEs). Unemployment was low: their estimate suggests an average of 3.9 percent while the official average was 2.5 percent. Then in 1995-2002, the unemployment rate rose rapidly, by one percentage point per year, as SOEs shed massive numbers of workers and rural migrants flooded the cities in search of jobs. SOEs went from employing 60 percent of China's workforce in 1995 to 30 percent in 2002. Yet the official unemployment rate reflected none of that volatility. Unemployment peaked in 2003 and began to fall in later years, by the authors' calculations. It nevertheless still averaged 10.9 percent for the 2002-09 period while the official average was only 4.2 percent.

Compared to other nations with similar gross national income per capita, China's unemployment rate in 2009 was relatively high. The authors nevertheless caution against making direct comparisons with unemployment rates in other countries, because China’s urban household survey data do not define labor-force status in exactly the same way that many developed nations do.

Some groups had worse unemployment rates than others in the transition years from 1995-2002. The study estimates that the jobless rate was 18.3 percent for non-college-educated young women and 14.5 percent for non-college-educated young men. In contrast, the estimated rates were less than 2 percent for older college-educated men and women, whose advantage was evident both before and after the transition.

"Overall, we see that people without college degrees, younger people, and females systematically face more slack labor markets than their more educated, older, and male counterparts," the authors conclude. "The most striking pattern is that younger people had very high unemployment rates, especially for more recent cohorts... Even at the age of around 30, the 1970s female cohorts had roughly a 10 percent unemployment rate, as compared to only 3 percent for females born in the 1960s."

Unsurprisingly, some regions fared worse than others during the transition. The Northeast, South Central, and Southwest regions of the country saw the largest increases in their unemployment rates during the 1995-2002 period. These were also the regions with the greatest number of SOE layoffs. In the Northeast region, for example, some 7.3 million workers were laid off during the period–42 percent of its total SOE employment in 1995.

While China's unemployment rate has soared since the mid-1990s, labor force participation has dropped. Participation averaged 83.1 percent around 1995, fell dramatically during the transition, and stabilized at around 74 percent during the 2002-09 period. Young people were hit especially hard by the layoffs during the 1995-2002 period. The labor force participation rate of young men and women, with and without college education, all fell by more than 10 percentage points.

"The results suggest that cohort differences might be in play and that the younger generation may have faced higher cost and/or lower benefit in participating [in the] labor market," the authors conclude.

Thursday, October 08, 2015

Here at the University of Oregon, one of our specialties is developing models where agents in the macroeconomy don't have rational expectations, instead they learn about the economy over time. Of course, these models need to be taken to the data to see if people do actually learn in the way the models predict. But if the data sets contain too many "Very Serious People", the tests will surely fail. They learn nothing from experience:

The China Debt Fizzle, by Paul Krugman: Remember the dire threat posed by our financial dependence on China? A few years ago it was all over the media, generally stated not as a hypothesis but as a fact. Obviously, terrible things would happen if China stopped buying our debt, or worse yet, started to sell off its holdings. Interest rates would soar and the U.S economy would plunge, right? Indeed, that great monetary expert Admiral Mullen was widely quoted as declaring that debt was our biggest security threat. Anyone who suggested that we didn’t actually need to worry about a China selloff was considered weird and irresponsible.

Well, don’t tell anyone, but the much-feared event is happening now. As China tries to prop up the yuan in the face of capital flight, it’s selling lots of U.S. debt; so are other emerging markets. And the effect on U.S. interest rates so far has been … nothing.

Who could have predicted such a thing? Well,... anyone who seriously thought through the economics of the situation ... quickly realized that the whole China-debt scare story was nonsense. But as I said, this wasn’t even reported as a debate; the threat of Chinese debt holdings was reported as fact.

And of course those who got this completely wrong have learned nothing from the experience.

I’ve long believed that to understand business cycles we need to consider not just net flows but also gross interdependencies. A downturn in China will affect some businesses much more than others. If specialized labor and capital do not easily move to other sectors, that can end up having significant multiplier effects.

For example, while China may only account for 15% of world GDP, it has been a huge factor in commodity markets over the last decade. ... Of course, lower commodity prices [from the slowdown in China] will force layoffs for oil companies and miners but leave more money in the hands of consumers. However, additional spending from that channel has been more modest than many of us were anticipating.

Another concern comes from financial linkages. A Chinese downturn will unquestionably be a big hit for certain financial institutions. Exactly who those will be and what it means for the rest of us, I don’t know. As Warren Buffett observed, “you only find out who is swimming naked when the tide goes out.”

The bottom line is that an economic slowdown in China already is a very big deal for some U.S. workers and businesses. I don’t know what the ultimate implications for the U.S. of a significant recession in China would be.

Wednesday, September 23, 2015

Chinese Spillovers: China is clearly in economic trouble. But how worried should we be about spillovers from China’s woes to the rest of the world economy? I have in general been telling people “not very”, although it’s a bigger issue for Japan and Korea. But Citi’s Willem Buiter suggests that it could be a quite big deal, leading to a global recession. ... So could he be right?

Let me start with the case for not worrying too much, which comes down to the fact that China’s economy, while big, is still a small fraction of the global economy...

One possibility is ... that a Chinese slump could, via its impact on commodity prices, do a lot more harm to some other emerging markets than the above analysis suggests. I’m still working on this, although so far I don’t seem to be finding much there.

Another possibility is an international version of the financial accelerator. As Buiter points out, many emerging markets seem to be vulnerable thanks to private-sector foreign currency debt (which was so deadly in 1997-98). ...

Maybe, also, we could see some version of the financial contagion so obvious in the 1990s. Troubles in Brazil might make investors leery of other emerging markets, driving up interest spreads and forcing fiscal austerity that worsens the downturn. Or for matter, to the extent that the same hedge funds have been buying assets in a number of emerging nations, losses in one place could force them to liquidate assets elsewhere, causing a sort of global debt deflation. That was a popular story in the 1990s...

Overall, I’m not convinced of the Buiter thesis; China still seems to me not big enough to bring down the rest of the world. But I’m not rock-solid in that conviction, largely because we’ve seen so much contagion in the past. Stay tuned.

Saturday, September 19, 2015

China, Rates, and the Outlook: May the (Economic) Force Be with You: ...China has garnered almost as much editorial ink in the past month as U.S. presidential candidates—which may or may not be a complimentary comparison. I don’t want to sound pejorative by calling some of the commentary “hand-wringing”—though to be fair, some of it has been downright apocalyptic—but I don’t see the situation as dire. I’ve said publicly over the past few months that after going to China, and after talking to academics and officials there, I came away a lot less concerned than when I arrived. And I have to say that recent events have not changed my thinking to any serious extent.

This is where I’ll reuse one of the more helpful quotes for forecasting: “It’s difficult to make predictions, especially about the future.” With the dangers of prognostication acknowledged, I’ll tread into that territory anyway.

The China story is remarkable, and its growth over the past 30 years has been unprecedented.5 But now China’s at something of a crossroads, facing tradeoffs in their goals, dealing with a new normal for growth expectations, and pivoting to a new source of economic momentum.

It’s important to see the situation not through the filters of our own paradigms, but from the perspective of China’s unique position. China is not the U.S. Or the U.K. Or Japan. Its goals, structure, government, and place on its growth trajectory are very different, and looking to impose foreign expectations on China’s markets or actions can lead one astray.

Growth versus reform

In a nutshell, China is facing a tradeoff between its short-term growth goals and its longer-term reform agenda.

China’s government has made it abundantly clear that it is willing to intervene when necessary, ensuring that growth stays on its target path, even if that means extending the timeline on reform. That willingness to do “whatever it takes” to keep growth on target is what made me less worried about a hard landing for China.

Of course, that very disposition for intervention is the source of much hue and cry on this side of the globe. China has made important incremental steps on the road to liberalization, and from the perspective of a fully open, free-market, Western-oriented paradigm or advocacy, the recent stock market interventions seem anathema to that goal. But that’s a view through a narrow lens that may obscure the bigger picture.

For all its moves towards liberalization, China’s markets are not the same as ours. Yes, they have a reform agenda, but it’s a mistake to think that in the foreseeable future China will have fully open capital and financial markets in the way that we in the U.S. and other countries think about them. They are relaxing their grip on the exchange rate—allowing the renminbi to respond to economic news, letting its value be more market-determined—and as a policy approach, this is a positive; it’s something we as economists wanted to see happen. But it’s very clear that China is not going to let its exchange rate float completely freely. They’ll continue to have buffers to ensure that, should some dramatic event unfold, they can step in again and stop that interfering with their other goals. To some extent, we can see these moves as something akin to beta-testing liberalization. It is happening, which is a remarkable shift. But completely free, open markets are not in the cards, and the government has made clear that those are not their intention.

This, incidentally, is why talk about the renminbi replacing the dollar as an international reserve currency is unrealistic. The role of a reserve currency is to be a harbor during a storm; it’s where people flock when the unexpected happens. As we saw in the financial crisis, as we’ve seen in other crises, the market’s instinct is, when in doubt, go to the dollar. As long as China has controls in place to mediate the free flow of money, the dollar will be the refuge, not the renminbi.

In the context of China’s dual—oftentimes conflicting—goals, the recent stock market intervention by the government should be seen as what I believe it was: A move to keep growth on pace. It’s a pattern we’ve seen before. When the Chinese authorities see growth struggling, or other economic warning lights, they take steps, including reversing or postponing reforms, to keep growth at pace. Fiscal and economic policymakers can pull a number of levers and the Chinese government has proved again and again its willingness to do just that.

China’s growth rate

In balancing these objectives, the Chinese government has realistically moderated its expectations for growth. For decades we all marveled at China’s double-digit growth, and there was, perhaps, some expectation that it would persist in perpetuity. But growth like that is unsustainable. If you look at the progression of Japan, for instance, from the 1960s to the 1980s, or South Korea from the 1980s to the 2000s, you see the pattern China will likely follow.6 At low income levels, growth can be rapid, because low domestic wages make exports very competitive and there is so much untapped potential in moving workers to more productive pursuits.

But as income or GDP per capita rise, these advantages begin to ebb, and growth naturally slows. The pattern is clear, with a rapid decline in the growth rate and eventual leveling out as domestic income and wages rise. This is the natural progression of economies moving into maturity. The further they have to go, the faster they can grow; but once they’ve come to a place like Japan or Korea—that is, around 80 or 90 percent of U.S. per capita GDP—their growth expectations will be lower because they’re closer to the finish line. China obviously isn’t close yet, but it’s a good indicator of how much further it can go. What China’s accomplished has been amazing—but we also called Japan a growth miracle and Korea’s success was remarkable as well. There were challenges along the way for both countries, but ultimately, what slowed growth was entering the middle-income bracket and the inevitability of slower growth for wealthier countries.

The officials and economists I spoke to in China know that not only are the days of 10 percent growth behind them, but that it will move below the current 7 percent target. Seven will likely become 6, which will become 5, and so on as their economy moves into a middle-income economy and progresses to a high-income one.

Shift in focus

Of course, China faces challenges in continuing that advance. One is a refocus of its economic engine. Given the global environment, how do they successfully pivot their economy to more domestic consumption, moving the emphasis more toward services and away from manufacturing? That’s clearly a challenge, but also a central objective of the government.

For people who have concerns about China, one of the red flags they point to is that industrial production has slowed a lot, more so than the economy overall. I fall on the side of commentators who’ve pointed out that this isn’t surprising.7 China’s been talking for years about switching from industry to services. They’re moving from making steel and concrete to making consumer goods. One of the interesting things I heard this summer was the plan to build more tourism in China for China. That’s something that’s virtually nonexistent at the moment. They don’t have the abundance of recreational resources we do; in California alone, you can go skiing or surfing, to wine country or Disneyland. As high- or low-brow as you want it, we as Americans have become incredibly used to spending our leisure dollars domestically. That’s something China’s looking to do for itself.

When you look at where China’s priorities lie—in switching to services, in expanding tourism—it makes absolute sense that industrial production is slowing.

Liberalization and the impact of risks from abroad

I’ve mentioned that China is seen by some as a risk; but conversely, what effect does U.S. policy have on them? Right now, China is more susceptible to the shifts in U.S. monetary policy. But as they liberalize their exchange rate, it will automatically adjust to changes in situations around the world. This is a huge advantage and an automatic stabilizer. When China pegs to the dollar, they’re too linked to U.S. policy, so that when the U.S. tightens or loosens, they effectively follow suit. By allowing market-based influence, China will have a buffer when the U.S. economy is moving in a different direction than theirs. And that’s going to make it easier in the end for China to manage its economy.

An outside observer might ask why they haven’t done this already. I think that China was wary that unpegging would’ve interrupted the double-digit growth. When a country’s exchange rate and capital flows suddenly start shifting around dramatically, it can interfere with the ability to deliver on growth targets. As China’s growth targets have come down, and as they begin to shift away from an export-reliant economy, instead fueling itself via domestic consumption, they can start allowing their exchange rate to move—though again, it won’t be the free floating exchange rate that we have.

Friday, August 28, 2015

In the WSJ, Marco Rubio says Obama hasn't been tough enough with China on economic issues:

President Obama has continued to appease China’s leaders ...[with] his insufficient responses to economic ... concerns

What would he do?

For years, China has subsidized exports, devalued its currency, restricted imports and stolen technology on a massive scale. As president, I would respond not through aggressive retaliation, which would hurt the U.S. as much as China, but by greater commitment and firmer insistence on free markets and free trade. This means immediately moving forward with the Trans-Pacific Partnership and other trade agreements.

So, unlike Obama, who wants to move forward immediately with the TPP and other trade agreements, he'd move forward immediately with the TPP and other trade agreements.

Tuesday, August 25, 2015

Stupid China Stories: So a stock crash in China triggered a big decline around the world..., why should events in China matter for the rest of us?

Well, you and I might think that it’s because China is a pretty big economy... So when China slumps, you can and should expect knock-on effects elsewhere.

But trust the Republican field to declare that it’s all Obama’s fault. Scott Walker wants Obama to cancel a state dinner with Xi; Donald Trump says that it’s because Obama has let China “dictate the agenda” (no, I have no idea what he thinks he means). And Chris Christie says that it’s because Obama has gotten us deep into China’s debt.

Actually, let’s play a bit with that last one, OK? You could, conceivably, tell a story in which America becomes dependent on Chinese loans; then, when China gets in trouble, it demands repayment, pushing us into crisis too. But any story along those lines has a corollary: we should be seeing a spike in US interest rates as our credit line gets pulled. What you actually see is falling rates: ...

The background: China’s economy is ... slowing as China runs out of surplus labor. ... The ... problem is how to sustain spending during the transition. And that’s where things have gotten weird.

At first, the Chinese government supported the economy in part through infrastructure spending, which is the standard remedy for economic weakness. But it also did so by funneling cheap credit to state-owned enterprises. The result was a run-up in these enterprises’ debt, which by last year was high enough to raise worries about financial stability.

Next, China adopted an official policy of boosting stock prices... But the consequence was an obvious bubble, which began deflating earlier this year.

The response of the Chinese authorities was remarkable: They pulled out all the stops to support the market — suspending trading in many stocks, banning short-selling, pushing large investors to buy, and instructing graduating economics students to chant “Revive A-shares, benefit the people.”

All of this has stabilized the market for the time being. But it is at the cost of tying China’s credibility to its ability to keep stock prices from ever falling. And the Chinese economy still needs more support.

So this week China decided to let the value of its currency decline... But Chinese authorities seem to have imagined that they could control the renminbi’s descent, taking it a couple of percent at a time.

They appear to have been taken completely by surprise by the market’s predictable reaction; namely, the initial devaluation of the renminbi was ... a sign of much bigger declines to come. Investors began fleeing China, and policy makers abruptly pivoted from promoting currency devaluation to an all-out effort to support the renminbi’s value.

The common theme in these wild policy swings is that China’s leadership keeps imagining that it can order markets around, telling them what prices to reach. ... Do the country’s leaders really not understand why that won’t work?

If they really don’t, that’s a big concern. China is an economic superpower — not quite as super as the United States or the European Union, yet, but big enough to matter a lot. And it’s facing tough times. So if its leadership is really as clueless as it has been looking lately, that bodes ill, not just for China, but for the world as a whole.

Tuesday, August 11, 2015

This is by Zheng Liu, "a senior research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco":

Is China’s Growth Miracle Over?, by Zheng Liu, BRBSF Economic Letter: China’s economy grew 10% per year for over 30 years beginning in the early 1980s. No other country in modern history has achieved such exceptional growth for so long. Before the global financial crisis, China’s growth was primarily driven by productivity gains. Since 2008, however, growth has slowed and become increasingly dependent on investment.

Because China has been a large and expanding market for other countries, its growth prospects have important implications not just for the Chinese people but also for the global economy. This Letter examines the sources of China’s growth and some factors contributing to the recent slowdown, and offers a cautiously optimistic view of China’s future growth.

China’s growth miracle

Since the early 1980s, China’s open-door policy and economic reforms have led to a remarkable growth performance. As Figure 1 shows, China’s real GDP grew about 10% per year on average for 30 years before the recent slowdown. At that rate, national income doubles every seven years. No other country in modern history has achieved such high growth for so long.

Figure 1 China’s real GDP growth, annual percent change

Source: IMF World Economic Outlook, CEIC.

Rapid economic growth has significantly raised the living standards of the Chinese people. According to data from the Penn World Tables, China’s real GDP per person rose steadily from around 5% of the U.S. level in 1980 to about 20% in 2011. The World Bank estimates that, during the same period, over 600 million people in China have been lifted out of extreme poverty, defined as living for under $1.25 per day.

Engines of China’s growth

Theory suggests that three factors contribute to economic growth: capital accumulation, labor force expansion, and productivity improvement. Empirical evidence in China’s case suggests that growth in the third factor, known as total factor productivity, has been an important contributor to the three-decade growth miracle (see Zhu 2012). A series of domestic economic reforms beginning in the 1980s led to more efficient allocations of capital and labor and also better aligned private incentives. The open-door policy attracted foreign direct investment, which in turn brought new management practices, technological know-how, and access to the world market for Chinese businesses. These policy changes boosted productivity. As productivity improved over time, investment and production expanded. Although capital investment also contributed to growth, its contribution is limited by diminishing returns and thus, investment cannot be the main driving force of sustainable growth.

Figure 2 Accounting for China’s growth

Source: Penn World Tables and author’s calculations.

Figure 2 shows the contribution of each of the three factors to China’s growth since 1980. The calculation follows the growth accounting approach described by Zhu (2012), with China’s labor income share fixed at 0.5. The data for real GDP, employment adjusted for human capital levels measured by years of schooling, and capital stocks are taken from the latest version of the Penn World Tables (version 8.1; see Feenstra, Inklaar, and Timmer 2015 for a summary of the data).

As shown in Figure 2, China’s rapid growth was driven mostly by productivity gains and investment rather than employment growth. For example, out of the roughly 10 percentage points of average growth in the 1990s, capital accumulation accounts for about half of it, productivity improvement accounts for another 4 percentage points, and employment gains account for the remaining 1 percentage point. Labor’s limited role in part reflects China’s one-child policy that limits population growth and restrictive policies on internal migration, such as the “Hukou” system that restricts citizens’ abilities to work in cities other than where they were born. The figure also reveals a significant decline in the contribution of total factor productivity since 2008. Accordingly, China’s growth has become more dependent on capital investment in this more recent period.

The recent slowdown and new policy measures

During the global financial crisis, demand for Chinese exports fell substantially. Meanwhile, waning productivity gains presented further challenges for sustaining high growth. The Chinese government responded to the crisis by adopting a large-scale fiscal stimulus package, which was announced in November 2008 and implemented quickly in 2009 and early 2010 (Wong 2011; Faust, Lin, and Luo 2012). This policy accommodation significantly boosted investment growth, especially in targeted areas such as infrastructure and construction, and led to short-run booms in output in 2009 and 2010. Nonetheless, growth has slowed substantially since 2011. The average growth rate between 2011 and 2014 was about 8% (see Figure 1). Growth slowed further to 7% in the first two quarters of 2015, and the Chinese government officially lowered its growth target to 7% for the year. Although this rate is still quite remarkable by international standards, it is significantly lower than the 10% average recorded in the previous three decades.

The recent slowdown has raised the concern that China might be falling into a pattern commonly referred to as the “middle-income trap” (see, for example, Eichengreen, Park, and Shin 2011). Historically, fast-growing countries have often fallen into such a trap, in which growth slows sharply as income reaches a threshold level and wages rise sufficiently to erode a country’s comparative advantage.

However, some countries have successfully avoided the middle-income trap and moved to high-income status, which the Organization for Economic Co-operation and Development defines as GDP per capita of $12,500 based on 2011 constant international prices. These include China’s neighboring countries Japan and South Korea. In the 1960s, Japan had per capita real GDP of about $6,000 and an average growth rate of over 10% (see Figure 3). In subsequent decades, however, Japan’s GDP per capita rose and its growth slowed. By 2011, Japan’s GDP reached over $30,000 per capita and growth slowed to about 1.25%. South Korea has followed a similar path since the 1980s.

Figure 3 Will China follow Japan and South Korea?

Source: Penn World Tables, IMF. Curved line shows fitted trend.

China had a real GDP per capita of about $2,000 in the 1980s, which rose steadily to about $5,000 in the 2000s and to over $10,000 in 2014. If China continues to grow at a rate of 6 or 7%, it could move into high-income status in the not-so-distant future. However, if China’s experience mirrors that of its neighbors, it could slow to about 3% average growth by the 2020s, when its per capita income is expected to rise to about $25,000.

This may appear to be quite a pessimistic scenario for China, but China’s long-term growth prospects are challenged by a number of structural imbalances. These include financial repression, the lack of a social safety net, an export-oriented growth strategy, and capital account restrictions, all of which contributed to excessively high domestic savings and trade imbalances. According to the National Bureau of Statistics of China, the household saving rate increased from 15% in 1990 to over 30% in 2014. High savings have boosted domestic investment, but allocations of credit and capital remain highly inefficient. The banking sector is largely state-controlled, and bank loans disproportionately favor state-owned enterprises (SOEs) at the expense of more productive private firms. According to one estimate, the misallocation of capital has significantly depressed productivity in China. If efficiency of capital allocations could be improved to a level similar to that in the United States, then China’s total factor productivity could be increased 30–50% (Hsieh and Klenow 2009).

To address structural imbalances and thus achieve sustainable long-term growth, the Chinese government announced a blueprint of economic reforms at the Third Plenum in November 2013. The proposed reforms include (1) financial sector reforms—liberalizing interest rates, establishing deposit insurance, and strengthening financial supervision and regulation; (2) fiscal reforms—strengthening social safety nets, introducing more efficient and redistributive taxes, and improving health insurance and pension coverage; (3) structural reforms—reforming the SOEs and the Hukou system and further opening up markets; and (4) external sector reforms—liberalizing the exchange rate and capital account controls.

If these reform blueprints can be successfully implemented, then China should be able to avoid the middle-income trap and sustain long-term growth at a reasonable pace. In the transition process, however, structural reforms may contribute to a slowdown in economic growth.

Growth prospects

China’s growth is expected to slow further in the coming years. The International Monetary Fund (IMF) forecasts that growth will be about 6.8% for 2015. With an aging population, slowing productivity growth, and the policy adjustments required to implement structural reforms, growth is projected to slow further to 6.3% in 2016 and 6% by 2017.

Despite the slowdown, there are several reasons for optimism. First, China’s existing allocations of capital and labor leave a lot of room to improve efficiency. If the proposals for financial liberalization and fiscal and labor market reforms can be successfully put in place, improved resource allocations could provide a much-needed boost to productivity. Second, China’s technology is still far behind advanced countries’. According to the Penn World Tables, China’s total factor productivity remains about 40% of the U.S. level. If trade policies such as exchange rate pegs and capital controls are liberalized—as intended in the reform blueprints—then China could boost its productivity through catching up with the world technology frontier. Third, China is a large country, with highly uneven regional development. While the coastal area has been growing rapidly in the past 35 years, its interior region has lagged. As policy focus shifts to interior region development, growth in the less-developed regions should accelerate. With the high-speed rails, airports, and highways already built in the past few years, China has paved the way for this development. As the interior area catches up with the coastal region, convergence within the country should also help boost China’s overall growth (Malkin and Spiegel 2012).

Continued robust growth in China would be beneficial for the global economy as well. China’s market for U.S. exports has grown steadily from 4% in 2004 to over 7% in 2014. According to an IMF estimate, China contributed about one-third of the world’s growth in 2013.

Conclusion

China’s growth miracle since the early 1980s has significantly raised the standards of living in China. It has also made China an increasingly important contributor to world economic growth and a large and growing market for U.S. exports. The rapid growth was driven primarily by productivity gains and capital investment. The recent growth slowdown has raised the concern that China’s growth miracle could be ending.

However, if the structural reform plans from China’s Third Plenum can be successfully implemented, then the recent slowdown could be a smooth transition rather than a hard landing. This gives a reason for optimism that China will avoid the middle-income trap and follow the paths of Japan and South Korea to achieve high-income status.

Friday, July 31, 2015

What can we learn from the response of the Chinese government to the problems in China's stock market?:

China’s Naked Emperors, by Paul Krugman, Commentary, NY Times: ... We’ve seen ... strange goings-on in China’s stock market. In and of itself, the price of Chinese equities shouldn’t matter all that much. But the authorities have chosen to put their credibility on the line by trying to control that market — and are in the process of demonstrating that, China’s remarkable success over the past 25 years notwithstanding, the nation’s rulers have no idea what they’re doing. ...

China is at the end of an era — the era of superfast growth... Meanwhile, China’s leaders appear to be terrified — probably for political reasons — by the prospect of even a brief recession. ... China’s response has been an all-out effort to prop up stock prices. Large shareholders have been blocked from selling; state-run institutions have been told to buy shares; many companies with falling prices have been allowed to suspend trading. ...

What do Chinese authorities think they’re doing?

In part, they may be worried about financial fallout. It seems that a number of players in China borrowed large sums with stocks as security, so that the market’s plunge could lead to defaults. This is especially troubling because China has a huge “shadow banking” sector that is essentially unregulated and could easily experience a wave of bank runs.

But it also looks as if the Chinese government, having encouraged citizens to buy stocks, now feels that it must defend stock prices to preserve its reputation. And what it’s ending up doing, of course, is shredding that reputation at record speed.

Indeed, every time you think the authorities have done everything possible to destroy their credibility, they top themselves. Lately state-run media have been assigning blame for the stock plunge to, you guessed it, a foreign conspiracy against China, which is even less plausible than you may think: China has long maintained controls that effectively shut foreigners out of its stock market, and it’s hard to sell off assets you were never allowed to own in the first place.

So what have we just learned? China’s incredible growth wasn’t a mirage, and its economy remains a productive powerhouse. The problems of transition to lower growth are obviously major, but we’ve known that for a while. The big news here isn’t about the Chinese economy; it’s about China’s leaders. Forget everything you’ve heard about their brilliance and foresightedness. Judging by their current flailing, they have no clue what they’re doing.

Monday, December 08, 2014

The Chinese Century: ...2014 was the last year in which the United States could claim to be the world’s largest economic power. China enters 2015 in the top position, where it will likely remain for a very long time, if not forever. In doing so, it returns to the position it held through most of human history. ...

The areas where the United States remains competitive with China are not always ones we’d most want to call attention to. The two countries have comparable levels of inequality. ... China outpaces America in the number of people executed every year, but the U.S. is far ahead when it comes to the proportion of the population in prison... China overtook the U.S. in 2007 as the world’s largest polluter, by total volume, though on a per capita basis we continue to hold the lead. The United States remains the largest military power... (not that we have always used our military power wisely). But the bedrock strength of the U.S. has always rested less on hard military power than on “soft power,” most notably its economic influence. That is an essential point to remember. ...

The economic interests of China and the U.S. are intricately intertwined. We both have an interest in seeing a stable and well-functioning global political and economic order. Given historical memories and its own sense of dignity, China won’t be able to accept the global system simply as it is, with rules that have been set by the West, to benefit the West and its corporate interests, and that reflect the West’s perspectives. We will have to cooperate, like it or not—and we should want to. In the meantime, the most important thing America can do to maintain the value of its soft power is to address its own systemic deficiencies—economic and political practices that are corrupt, to put the matter baldly, and skewed toward the rich and powerful. ...

Though a potential global financial crisis was averted at the last minute,
one notable development has been a string of warnings by Chinese officials.
...

These statements, unusually blunt coming from the Chinese, show that
repeated, avoidable crises threaten the privileged position of the U.S. as
issuer of the world’s main reserve currency and (until now) risk-free debt.

It is unlikely that China would provoke a sudden, international financial
calamity — for instance, by unloading U.S. Treasury securities and other
government debt. Nonetheless, the process of repeated crises and temporary
reprieves will only solidify the Chinese government’s determination to
diversify its holdings away from dollar-denominated assets. Moreover, these
crises provide ammunition to advocates within the Chinese government for
expanding the role of the renminbi in international markets. Both of these
trends will erode the ability of the United States to issue debt at
super-low interest rates, and accelerate the ascent of China’s currency.
...[more]...

The Chinese government has been quite aggressive in increasing the use of
the Chinese currency, as noted in
this post. The yuan is far from becoming a reserve currency
[1]
[2], but there are other dimensions of an international currency that
the CNY could fulfill. One of these is use as an invoicing currency, and
here, the CNY has made rapid progress.

In a study conducted by myself and Hiro Ito (revision soon to be put
online), we document the rise in CNY invoicing for Chinese exports and
imports, and compare against JPY invoicing for Japanese exports and imports.
...

In the study, we employ a panel time series analysis to predict invoicing,
and conclude that 2010 levels of CNY invoicing of exports are below
model-predicted levels, suggesting further increases in home currency
invoicing are plausible.

Suppose that those of us now worried that China's
Ponzi bicycle is hitting a brick wall (or, as some readers have
suggested, a BRIC wall) are right. How much should the rest of the world
worry, and why?

I'd group this under three headings:

1. "Mechanical" linkages via exports, which are surprisingly small.2. Commodity prices, which could be a bigger deal.3. Politics and international stability, which involves some serious
risks.

To Paul's list, I would add a fourth: financial linkages. If there are
significant disruptions to China's system for funding credit, that could have
implications for anyone borrowing from or lending to Chinese entities.....

I'd also like to add an observation to Paul's second point involving
commodity prices. A significant economic downturn in China could well mean a
collapse in oil prices. One would think that, as a net importer, this would be
an overall favorable development for the United States, and certainly it would
be a significant plus for many individual U.S. firms and producers. But it's
worth remembering what happened after the collapse in oil prices in 1986. In the
years leading up to that, just as today, there had been a dramatic economic boom
in the U.S. oil-producing states... When oil prices collapsed, domestic
producers took a significant hit. ...

Start with the data, unreliable as they may be. What immediately jumps out
... is the lopsided balance between consumption and investment..., for China
... almost half of G.D.P. is invested.

How is that even possible? ... The story that makes the most sense to me ...
rests on an old insight by the economist W. Arthur Lewis, who argued that
countries in the early stages of economic development typically have a small
modern sector alongside a large traditional sector containing huge amounts
of “surplus labor” — underemployed peasants making at best a marginal
contribution to overall economic output.

The existence of this surplus labor, in turn, has two effects. First, for a
while such countries can invest heavily in new factories, construction, and
so on without running into diminishing returns, because they can keep
drawing in new labor from the countryside. Second, competition from this
reserve army of surplus labor keeps wages low even as the economy grows
richer. ...

Now, however,... to put it crudely, it’s running out of surplus peasants.
That should be a good thing. Wages are rising; finally, ordinary Chinese are
starting to share in the fruits of growth. But it also means that the
Chinese economy is suddenly faced with the need for drastic “rebalancing”...
Investment is now running into sharply diminishing returns and ... consumer
spending must rise dramatically to take its place. The question is whether
this can happen fast enough to avoid a nasty slump.

And the answer, increasingly, seems to be no. The need for rebalancing has
been obvious for years, but China just kept putting off the necessary
changes...

How big a deal is this for the rest of us? ... Western economies are going
through their “Minsky moment,” the point when overextended private borrowers
all try to pull back at the same time, and in so doing provoke a general
slump. China’s new woes are the last thing the rest of us needed.

No doubt many readers are feeling some intellectual whiplash. Just the other
day we were afraid of the Chinese. Now we’re afraid for them. But our
situation has not improved.

Tuesday, May 28, 2013

China and the Environmental Kuznets Curve: The original
Kuznets curve posited, back in 1955, that inequality of incomes would
follow an inverted-U pattern as a nation's economy developed, first rising,
and then declining. In 1955, this looked reasonable! The "environmental
Kuznets curve" suggests that pollution may follow an inverted-U pattern as a
nation's economy develops. Pollution first rises as a low income nation
industrializes with few limitations on pollution. But then the nation
becomes better-off and more able and willing to pay the costs of limiting
pollution, and the nation's economy shifts from industry to services, and
pollution levels fall. For a useful overview article, Susmita Dasgupta,
Benoit Laplante, Hua Wang, and David Wheeler wrote on "Confronting
the Environmental Kuznets Curve" in the Winter 2002 issue of the Journal
of Economic Perspectives. (Like all articles in JEP, it is
freely available online compliments of the American Economic Association.
Full disclosure: I've been the Managing Editor of JEP for the last 26
years.)

Of course, the environmental Kuznets curve is a theory that needs to be
supported or refuted with evidence... And the experience of China,
with its burgeoning economy and extraordinary environmental issues, is at
the center of the debate. ...

The conventional environmental Kuznets is that emissions of pollutants rise
up until some level between about $5000 and $8000 in per capita income, and
then fall after that point. There is some historical evidence to support
this claim. ...

According to the World Bank, China's per capita GDP was $5,445 in 2011, so
it is just reaching the levels where its pollution should first start to
level off, and then to decline. ...

Interestingly, there are signs that for some pollutants, the level of
pollution is no longer rising with the growth of China's economy. For
example, here's a figure about air pollution. The top line shows the growth
of GDP. Emissions of sulfur dioxides and soot have not been rising with
GDP, and even emissions of carbon dioxide have been lagging behind the rise
in GDP in the last few years.

Here's a similar figure for water pollution. Chemical oxygen demand (COD)
measures the level of organic pollutants in water. Both that measure and
wastewater are at least not rising at the same pace as GDP.

It remains true that China's amount of pollution relative to its economic
output is high by the standards of high income countries. ...

The policy prescription for reducing pollution in China is clear enough:
close down older facilities, and make sure their replacements have
up-to-date anti-pollution equipment; keep building sewage treatment
facilities; put a price on polluting activities to encourage conservation;
and so on. Sam Hill's
paper has details.

But ultimately, China's path along the environmental Kuznets curve will be
determined by politics and public pressure, and public pressure in China
does seem to be building for stronger environmental protection. The
(wonderfully named) Elizabeth C. Economy at the Council of Foreign Relations
recently wrote a brief piece on "China’s
Environmental Politics: A Game of Crisis Management," which notes the
growing number of environmental public protests in China. In a society under
such a high degree of government control, environmental protests can become
a place where those discontented with government have a semi-safe space for dissent.

Saturday, April 06, 2013

The Chinese economy has developed at a remarkable pace over the last 30
years. The integration of China into the world economy has led to
extraordinary flows of foreign direct investment, infrastructure buildup,
and an impressive export capacity. As we look to the future,
both domestic and international considerations bear on the capacity for
China to continue on this robust course and for the world to adjust to
China’s growth and changed role. The differences in philosophical, legal,
and governance systems between China and the West suggest that the
challenges will be formidable and that cooperation and mutual benefit will
require extraordinary attention.

Friday, April 05, 2013

A few quick., unorganized thoughts as I wait for today's sessions to start:

As I noted in an earlier post, one of the things I wanted to learn about at
this conference is the sustainability of China's growth model and its
applicability to other countries. One of the big issues is China's ability to
rebalance its economy toward more reliance on internal consumption and less on
exports. It's a delicate process because of China's large reliance on export-led
growth. If China reduces its exports, but isn't able to successfully replace it
with domestic consumption, it could cause huge problems for the economy.
Nevertheless, rebalancing is essential. A second issue is growing inequality and
the social unrest that comes with it.

What surprised me is an argument from Huang Yiping, Professor of Economics, National School of Development, Peking University, that this process
is already well underway. He claims that if you correct for the service
component of GDP, which is under reported, consumption has already climbed from
somewhere in the 40 percent range to 52 percent of the
economy. In addition, according to his estimates -- which I found convincing --
inequality is falling as well. Then main reason for this is a labor shortage
(believe it or not) that is driving up wages, a process that began around 2008.
Thus, there has been a transfer from profits -- which flow to higher incomes --
to wages of those at the bottom of the distribution (the five year plan allows for a 13 percent per year increase in the minimum wage).

So the argument is that it is not only possible to rebalance the economy and
reduce inequality, this is well underway. Still, there's a long way to go
yet and it's far to soon to declare victory.

[The video for this session isn't available yet -- I'll post it when it is.]

Monday, March 25, 2013

This Economic Letter from the SF Fed says we can trust recent economic data
from China:

On the Reliability of Chinese Output Figures, by John Fernald, Israel
Malkin, and Mark Spiegel, FRBSF Economic Letter: Some commentators have
questioned whether China’s economy slowed more in 2012 than official gross
domestic product figures indicate. However, the 2012 reported output and
industrial production figures are consistent both with alternative Chinese
indicators of the country’s economic activity, such as electricity
production, and trade volume measures reported by non-Chinese sources. These
alternative domestic and foreign sources provide no evidence that China’s
economic growth was slower than official data indicate.

Wednesday, February 20, 2013

Taxing Carbon, by Vikas Bajaj, NY Times: Long considered the biggest holdout
in climate change negotiations, China said this week that the country would
implement new taxes designed to curb greenhouse gas emissions. Officials in
Beijing provided few details, but a
report by the state-owned Xinhua news service suggested that the government
is working on a relatively modest plan. ...

The Xinhua report ... did not say how big a tax the country would impose, but it
pointed to a three-year-old proposal by government experts that would have
levied a 10-yuan ($1.60) per ton tax on carbon in 2012 and raised it to 50-yuan
($8) a ton by 2020. Those prices are far below the $80 (500-yuan) a ton that
some experts have suggested would be needed to achieve “climate stability,” and
which would raise the cost of gasoline by about 70 American cents a gallon.

China’s plan will not make a serious dent in global warming, though the tax may
still have some beneficial impact within the country, where air pollution is a
serious problem. ...

Meanwhile, in the U.S., many members of Congress find the idea of carbon taxes
totally anathema and think such taxes would wreck the economy. They might,
however, want to consider a proposal promoted by Mr. Hansen that would take the
money collected from carbon taxes — or carbon fees as he prefers to call them —
and rebate it in full to individuals. That would help consumers pay for more
expensive electricity and gasoline, while giving them an incentive to cut their
use of energy and fossil fuels. It’s an elegant way to limit damage to the
economy while giving people incentives to do what is right for the planet.

Contrary to what "many members of
Congress" (i.e. many Republicans) claim, eliminating a market failure through a carbon tax moves the economy closer to
the optimal growth path rather than further from it.

Tuesday, October 23, 2012

We Should Stop Blaming China for our Economic Problems: The second
presidential debate featured Mitt Romney and Barack Obama going nose to nose
over who would be tougher on China and other countries over their unfair trade
practices. But by adopting a narrative that places the blame for our problems on
other countries, President Obama is playing into the hands of those who’d like
to make significant cuts to social insurance programs that protect working class
households. ...

Here's the bottom line:

Blaming our troubles on external causes and implying that all will be well once
these causes are eliminated allows the wealthy winners from globalization to
escape the taxes that are needed to provide the social protections workers need
in the global economy, and to ensure that the gains from globalization are
shared equitably. President Obama needs to make it clear that helping the
working class will take a lot more than just forcing China to change its ways... [It] will require us to look inward at
our own character as a nation instead of blaming others.

Pointing fingers at other countries and demanding change may be politically
effective, but the real change begins at home.

Think of it this way: the argument that interest rates would soar if the Chinese
bought fewer bonds is the same as the argument that interest rates would soar
when the U.S. government sold more bonds — which, as you may recall, was the
subject of
fierce debate more than three years ago — and you know how that turned out.

Again, you can think of this in terms of
Wicksell: we’re in a situation in which the incipient supply of savings —
the amount that people would save at full employment — is greater than the
incipient demand for investment. And this excess supply of savings leads to a
depressed economy.

What China does by buying bonds is add to the excess savings — which makes our
situation worse. (This is just another way of saying that the artificial trade
surplus hurts our economy — just another way of stating the same thing). And we
want them to do less of it; far from fearing that they will stop, we should
welcome the prospect.

Yet this point isn’t even controversial — by and large, commentators aren’t even
aware that fear-of-China syndrome might be in error.

So the central problematic for "European exceptionalism" was to identify some
set of features of western society lacking in China that could account for
takeoff. Was it merchant culture? Perhaps Newtonian science? Was it European
family and reproductive behavior? Or perhaps it was some feature of
Christianity?

Pomeranz doesn't like these theories. More basically, he doesn't accept the
premise of European economic superiority in 1600, whether in institutions or
ideology. He considers agriculture first and holds that Chinese agriculture was
as productive in terms of land and labor as English farming; it was not
undergoing involution through population increase; and it supported a rural
standard of living that was competitive with that of Europe and England, his
primary focus.

Pomeranz doesn't doubt that there were sharp differences in European and Chinese
economic development in the 18th century. This is the "great divergence" to
which he refers. But he doubts that there are grand socio-cultural explanations
for this fact; instead he focuses on contingent conjunctival circumstances that
gave England a lead that it maintained for 200 years. These include the
fortuitous location of coal in Britain, the fact of New World wealth, and the
returns if slave labor in North America. None of these is a deep systemic factor
but rather a lucky break for Britain.

Bin Wong adds a different theme to the debate. He recognizes that Europe and
China possessed complex political-economic systems that were different from each
other. And he agrees that these systems had consequences for development. But he
agrees with Pomeranz that neither system is inherently superior. And he calls
for an economic history that pays attention to the differences as well as
similarities. Each process of development can be illuminated by comparison to
the other.

So where is the debate today? This was the focus of a productive conference at
Tsinghua University in Beijing last week. Some of the primary contributors to
economic history participated, including Robert Allen, Bozhong Li, and James
Lee. It isn't possible to summarize the papers, but several themes emerged. The
most basic is the need to bring substantially more factual detail to the debate.
What we need at this point isn't more theorizing about large causes; it is more
fine grained factual discovery across both Europe and China.

Three areas in particular have gotten much more factual in the debate in ten
years. the first is agricultural productivity. Historians like Robert Allen and
Bozhong Li have substantially sharpened our knowledge of the farm economies of
England and China.

Second is the question of the historical standard of living in various places.
Essentially this depends on price data, wage data, and a system for comparing
consumption across countries. Here too there has been a great refinement of our
knowledge. Robert Allen has contributed much of this.

Third is population behavior. The Malthusian theory of the difference between
China and Europe is a stumbling block, and of course this theory was created in
a fact-free universe. Now comparative historical demography has advanced a long
way thanks to researchers like James Lee. The Eurasian Population and Family
History Project has now refuted the Malthusian view.

A key idea in the Pomeranz debate is Philip Huang's idea the Chinese agriculture
was "involutionary". The work provided by Bozhong Li demonstrates that this
theory is simply incorrect when applied to the lower Yangzi River delta.
Moreover, China's development after 1970 makes the theory implausible in any
case. As Li pointed out at the conference, "It is inconceivable China's modern
development could have occurred in the conditions of involution described in the
debate." China was clearly not caught in an inescapable involutionary trap.

So there is work to be done still on the origins of the great transformation.
And it is valuable for this work to take place with a global and comparative
perspective. But most valuable will be detailed factual research that adds
significantly to what we know about the past.

Monday, June 04, 2012

Will Jobs Be Reshored from China?, by Timothy Taylor: China is becoming a less attractive place for off-shoring of manufacturing. But the result isn't likely to be a large movement of jobs back to the United States. Instead, globally mobile manufacturers are likely to seek out alternative low-cost destinations. Michel Janssen, Erik Dorr, and Cort Jacoby of the Hackett Group discuss these issues in a report called "Reshoring Global Manufacturing: Myths and Realities." The subtitle is: "By next year, China’s cost advantage over manufacturers in industrialized nations and competing low-cost destinations will evaporate." The report is freely available here, with free registration. ...

I was ... struck by some comments in the report about Apple's labor costs with the iPad and outsourcing to China. They emphasize that in some industries like furniture manufacturing, cost matters most. But in other industries, product quality, protection of intellectual property, time to market and ramp-up speed may matter more.

"The Chinese labor-cost component of an entry-level iPad retailing for $500 is estimated at $10, or 2% of revenue, while the profit margin is estimated at $150, or 30% of revenue. If Apple were to move production to the USA, and if one assumes that assembly costs would triple (to $30), it is conceivable that Apple could convince customers to pay for a large portion of the price increase based on the appeal of a “made in the USA” product. ... Furthermore, ... such a move could substantially boost Apple’s corporate image. However, the U.S. lacks the sheer labor capacity that would be required in order to ramp up production of iPads at the speed needed to maintain the company’s edge in the hyper-competitive tablet and mobile device market. ... Thus one may assume that Apple’s manufacturing sourcing strategy is primarily motivated by scalability and supply chain risk, and only secondarily by total landed cost."

Thursday, May 31, 2012

Cash Exiting China, by Tim Duy: Something that I have thinking about for a few weeks - and was reminded of reading Ryan Avent this morning - is the series of pieces at FT alphaville regarding the outflow of cash from China. See here and here and here. The thinking had been that the renminbi was a one-way bet as China moved forward with capital account liberalization as investors rushed to be part of the Chinese story. The growing exodus of cash, however, is calling that story into question.

Moreover, I am interested in how much of the outflow is attributable to a generalized rush to safety as a result of the European crisis versus how much is attributable to capital flight due to a a deteriorating economic environment inside China itself. I am reminded of this story from the Wall Street Journal earlier this year:

With a fortune of at least $1.6 million, Mr. Shi is part of the wealthy elite that benefited most from the Communist Party's brand of capitalism. He is riding the crest of arguably the biggest economic expansion in history.

And yet, while the party touts the economic success of the "Chinese model," many of its poster children are heading for the exits. They are in search of things money can't buy in China: Cleaner air, safer food, better education for their children. Some also express concern about government corruption and the safety of their assets.

Domestic money in China will be the first to head for the exit - insiders will always know more than outsiders about the underlying economic conditions. So the exodus of cash could indicate that the Chinese story is coming to a close - and that will have significant consequences for the global economy. It is another signal that emerging markets will not be supporting global demand anytime soon. I think the team at alphaville is right - this story is slipping under the radar while we all have our eyes focused on the farce in Europe. But it could be the real game changer in the global economy.

Wednesday, May 02, 2012

A quick one while waiting for Bill Clinton to take the stage at the conference I'm attending. This is Ken Rogoff:

Why a More Flexible Renminbi Still Matters, by Kenneth Rogoff, Commentary, Project Syndicate: One of the most notable macroeconomic developments in recent years has been the sharp drop in China’s current-account surplus. The International Monetary Fund is now forecasting a 2012 surplus of just 2.3% of GDP, down from a pre-crisis peak of 10.1% of GDP in 2007, owing largely to a decline in China’s trade surplus – that is, the excess of the value of Chinese exports over that of its imports.

The drop has been a surprise to the many pundits and policy analysts who view China’s sustained massive trade surpluses as prima facie evidence that government intervention has been keeping the renminbi far below its unfettered “equilibrium” value. Does the dramatic fall in China’s surplus call that conventional wisdom into question? Should the United States, the IMF, and other players stop pressing China to move to a more flexible currency regime?

The short answer is “no.” China’s economy is still plagued by massive imbalances, and moving to a more flexible exchange-rate regime would serve as a safety valve and shock absorber. ...[continue reading]...

In an evening broadcast on state-run China National Radio, Mr. Wen told an audience of business leaders that China's tightly controlled banking system needs to change. "Let me be frank. Our banks earn profit too easily. Why? Because a small number of large banks have a monopoly," said Mr. Wen... "To break the monopoly, we must allow private capital to flow into the finance sector." ...

Mr. Wen's push is part of a broader set of issues over China's growth, and came on the same day that Beijing unveiled programs intended to support the development of the country's capital markets and to spread international use of the yuan. Among them, China's security regulator said it would more than triple the amount that foreigners would be allowed to invest in China's heavily restricted financial markets to $80 billion. ...

Mr. Wen's remarks, in the export-oriented province of Fujian, are further indication that long-delayed economic reform is now at least a topic for public debate. ...

The major question is whether increasing rhetoric and new initiatives toward economic revisions will lead to broader reform. Prior efforts have faltered amid Beijing's drive to keep a tight rein on the economy and opposition from interest groups. ...